Declines in U.S. innovation, entrepreneurship the focus at Capitol Hill patent policy event

2017-05-17

“Innovation and creative endeavors are indispensable elements that drive economic growth and sustain the competitive edge of the U.S. economy.” Thus reads the start of the executive summary for the 2016 update to the Intellectual Property and the U.S. Economy study jointly produced by the U.S. Patent and Trademark Office as well as the Economics & Statistics Administration. The report identifies 81 IP-intensive industries which employ about 30 percent of the American workforce and account for 38.2 percent of U.S. gross domestic product in 2014.

“All of the giants today were once garage startups that clawed, fought and used every means to their advantage to overcome the incumbents,” said Robert Aronoff, executive director of the U.S. chapter of the International IP Commercialization Council (IIPCC). “These companies benefited greatly from the system as it was.” Aronoff’s remarks came at the start of an IIPCC-sponsored event taking place in the basement of the U.S. Capitol on May 8th, an event titled Promoting Innovation, Investment and Job Growth by Fixing America’s Patent System. The event featured a series of panels and keynote speakers addressing various concerns raised over recent changes to the U.S. patent system and how those changes have created an uneven playing field to the detriment of individual and small startup stakeholders in the system. See our other coverage here, here and here.

Anyone who has paid attention to the current political climate in the United States, especially conversations surrounding economic nationalism and the renegotiation of international trade agreements, would have to acknowledge that there are many who feel as though the American economy is lagging. Last October, The Wall Street Journal published a story titled Sputtering Startups Weigh Down Growth which outlined the gradual decline of U.S. startups since 1977. In 2014, only 8 percent of private U.S. firms were less than one year old, down from more than 16 percent in 1977. As well, the share of U.S. workers working at firms less than one year old has dipped over that same period of time from nearly 6 percent of U.S. workers in 1977 down to 2.1 percent in 2014.

At the same time that America’s business climate has become too acidic for a vast majority of domestic startups, the nation has also been losing its place in the global supply chain while other major global economies, like China’s, are becoming increasingly self-reliant. Another Wall Street Journal article published last October not only showed recent dips in the value of China’s overall imports and high tech imports but also the percentage of foreign inputs used in Chinese exports. Such foreign inputs in products sold by Chinese manufacturers rose sharply from just more than 5 percent in 1981 up past 40 percent by the mid-1990s, but these foreign inputs dropped steadily to 19.65 percent by 2015. “There’s less and less reason why they need us, they’re protecting their innovation and tech more and more,” Aronoff said of China, adding that this issue deserved further discussion.

Still other issues facing innovators hoping to use the U.S. patent system to commercialize emerging technologies were highlighted by a Hope Cycle for Emerging Technology reportissued last year by market research firm Gartner. This report identifies trending emerging tech like virtual reality, augmented reality, machine learning, smart robots, gesture control devices, smart data discovery and virtual personal assistants, as well as consumer expectation levels and the length of time until the emerging tech becomes fully commercializable. As Aronoff noted, much of the innovation in those sectors relies on software. “Is that even protectable anymore?” Aronoff asked.

“We’re here to have a frank discussion about, ‘Are we doing the right things to protect the engine of innovation of America,” Aronoff said. He highlighted several issues that would be discussed at length throughout the day, including the need for patents, costs/benefits of patent licensing and patent invalidation, patent monopoly and patent troll myths, the state of the U.S. patent system from the trenches, costs/benefits of a strong U.S. patent system and strategies for getting the country back on track in terms of sensible patent policy. “With the new patent enforcement gauntlet in the U.S., what does it really take for a small company to protect its IP in the current system?” Aronoff asked, adding that the patent troll myth could very well be a red herring which has distracted U.S. patent policy makers.

Aronoff’s remarks were followed by Dr. Carl Schramm, professor at Syracuse University and an U.S. IIPCC board member. “There’s an entrepreneur crisis in the U.S., which is reflective of an innovation crisis,” Schramm said, adding that while the two distressing trends were happening together, they weren’t being well understood or seen by mainstream observers.

Schramm led off his remarks by pointing to a couple of inverse correlations, which can be inferred when looking at U.S. entrepreneurship and innovation. Despite the fact that academic programs for entrepreneurship have exploded from four schools in 1990 up to more than 3,000 schools employing more than 6,000 entrepreneurship professors currently, and yet U.S. entrepreneurship has declined. Similarly, business incubators have spurted from 12 local incubators in 2002 up through 1,400 such incubators today. “The more of them we open, the fewer entrepreneurs we produce,” Schramm said. He added that less than 20 percent of such incubators currently keep statistics on the success of incubator startups, calling that a “terribly disturbing statistical vacuum.” “Why would local guys who are mostly picked by governors and mayors to be venture capital advisors do better than the professionals?” Schramm asked. “There is no science in this business.”

Teaching students to become entrepreneurs in their early 20s is something that we’re “enamored with” in the U.S. but young adults have a limited worldview compared to those in their late 30s; the average age of a person beginning a successful startup earning over $1 million in yearly revenues is 39. In Schramm’s view, about 70 percent of the startup ideas coming from students in university entrepreneur programs relate to university-specific problems, such as reducing food waste in cafeterias or parking management systems for football stadiums.

Schramm wound up his remarks by focusing on four aspects of the current landscape affecting American innovation, beginning with the sensitivity of American innovators to the signals that it’s becoming more difficult to be a successful innovator as an individual. Much of this sensitivity has been triggered by an abundance of regulations which have left business students with questions as to whether the federal government will essentially need to approve new business concepts or industries. “If you don’t think that it’s an overburden on people’s ability to think freely, you are really, really wrong,” Schramm said.

Another issue has been the consolidation of power into larger firms which has led to a presumption that big business is where true innovation occurs. Schramm pointed to the consolidation of the U.S. healthcare industry which has been impacted most significantly by the 2010 enactment of the Affordable Care Act (ACA). As a result, the number of healthcare companies has dropped drastically from the 211 health insurance providers operating prior to the ACA. “America is moving in a direction where government, big business and big labor would control the economy and give us endless prosperity,” Schramm said. “It doesn’t work, and it couldn’t work because it stands in the place of the individual.”

The consolidation of larger firms leads to Schramm’s next point, that current viewpoints on antitrust litigation were rather lax. Whereas entrepreneurs used to create companies with venture capital investment which they saw as their life’s work, Scramm said that 80 percent of startups today are sold to other companies. Many startups have exit strategies in place which consider a sale before the company even begins operations. “It’s very hard to find an entrepreneur who says that ‘I’m going to build this company in my vision,’” Schramm said. Finally, Schramm noted the “dangerous vision” that jurisprudence on patent policy and other issues were shifting from the United States to Europe. “We’re the only country on Earth that does things really right,” Schramm said. “Any time I hear that we’re going to harmonize with Europe, I get hives.”